Since then Indian policy makers have been proud of the fact that cautious policies with regard

to capital flows
and financial integration had helped the country avoid financial crises and reduce the impact of the 2008 crisis
on the country. Yet there is a strong segment of government opinion which is still in favour of full
convertibility. This is only partly because of the beliefs (i) that India is “different” and can handle convertibility
much better than other developing countries; and (ii) that convertibility is a requirement for India to move from
developing to developed country status.

Capital account convertibility is actually a monetary policy that centers around the ability to conduct local

financial assets transactions into foreign financial assets at exchange rates determined by the market. It is also

called as Capital Asset Liberation. It is a policy that allows easy exchange of domestic currency for foreign

currency. It helps the local traders to conduct their transactional business easily without the need of foreign

currency exchanges to handle small scale transactions. This policy is a guideline to ownership changes in

foreign or domestic financial assets & liabilities.

The five basic statements being designed as points of action in Capital Account Convertibility
(CAC) are as follow

The forecasts made by the Tarapore Committee regarding Indian CAC are as follows:

 A prescribed average inflation rate of 3% to 5% will exist for a three-year time period, from1997-98
and 1999-2000.
 The non-performing assets will experience a decline to 12%, 9% and 5% by the years 1997-98, 1998-
99 and 1999-2000 respectively, with respect to the total or aggregate advances.
 By the years 1997-98, there will be a complete deregulation of the structure of interest rate.
 The gross fiscal deficit will fall from 4.5% in 1997-98 to 4.0% in 1998-99 and further to 3.5 % in 1999-
2000, with respect to the GDP.

Benefits and drawbacks of CAC:

To sum up, CAC is concerned about the ownership changes in domestic or foreign financial assets and
liabilities. It also represents the formation and liquidation of financial claims on or by the remaining world. It
enables relaxation of the Capital Account, which is under tremendous pressure from the commercial sectors of
India. Along with the financial capitalists, the reputed commercial firms in India jointly derive and enjoy the
benefits of the CAC policy, which speculate the stock markets through investments. In fact, the CAC policy in
India is pursued primarily to gain the speculator's and the punter's confidences in the stock markets.

However, CAC does not serve the purposes of the real sectors of Indian economy, like eradication of poverty,
escalation of the employment rates and other inequalities.In spite of CAC being present in Indian economy,
there will be a co-existence of financial crises. Despite several benefits, CAC has proved to be insufficient in
solving the Indian financial crises, the complete solution of which lies in having a regulated inflow of capital
into the economy.